Sunday, September 07, 2008

My Sagacious Barber

We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself. We believe in the free market as the best tool to sustained prosperity and opportunity for all.

"The fact is, the markets work, and they are working. And people - some of the big companies obviously - have taken risks. Risk means risk. And there's an upside as well as a downside in some of the choices they've made. We have to be careful not to have this set of developments lead us to significantly expand the role of government in ways that may do damage long-term for the economy. We don't want to interfere with the basic, fundamental working of the markets."

"What exactly is our opponent's plan? What does he actually seek to accomplish, after he's done turning back the waters and healing the planet? The answer is to make government bigger"...

-Sarah Palin, Republican National Convention

While I was sitting in his chair a couple of weeks ago, my barber leaned close and said he had a stock tip for me. He said he had just bought some Fannie Mae. When I told him I didn't think that was such a great idea, he scoffed at my pessimism, confidently claiming that "the government will never let it go under." He grew up in Russia during the 1970's, so he knows a good government guarantee when he sees one. And as of Friday he was up nicely on his Fannie stock.

Unless he cashed out already, we'll see what happens to his investment this week. The news about the taxpayer takeover of Fannie and Freddie is both momentous and unsurprising. To the extent it's the latter, I don't have much more to say that I haven't said before. In one sense, the timing is outrageous: just before an election, and right after an inconveniently bad week for the stock market. But for fans of accountability, the timing is good. Far better now than after Inauguration Day. This way, at least the responsibility is clear, and the Kudlows of the world won't be able to spend the next few decades blaming the Democrats. In a perfect world, any political party that presided over this sort of debacle would wander in the wilderness for years or be permanently discredited. Instead, the incumbent party finds itself within a few percentage points of being rewarded with a third term in the White House. If Americans decide to give it that third term, they'll deserve everything they get -- not only financially but, as I've said before, in terms of national security/physical safety.

Who will pay for this? Nominally, every taxpayer. But in real terms and disproportionately, the prudent will pay via inflation. Did you sit patiently on the sidelines during the past few years while building your savings? The unstated message of these bailouts and interventions is as damaging as it is clear: participate in the next bubble. Buy into the "ownership society." (The cheapening of that important concept has been one of the worst big-picture effects of this era.) You're prudent at your own risk, because when the bubble pops you'll be forced to participate whether you like it or not. If people really understood what was going on here -- essentially a system of "soft slavery" in which an ever-increasing amount of one's daily labor subsidizes Wall Street and the speculator class via inflation and the socialization of risk -- they'd be in the street. Of course very few do understand it, which is what policymakers count on.

In the long run, the best way to protect yourself from this madness is to shun the U.S. dollar in favor of other currencies and gold. The nations that have had the gall to do that during the past few years -- Russia, Venezuela, and Iran among others -- constitute an existential threat to Bailout Nation. How much longer can we allow that? It's not too hard to see where all this is going, is it?

Did you sit patiently on the sidelines during the past few years while building your savings?

Yeah, that's exactly what I did.

I'm a teacher by profession, so I don't get too sexy with my investment and retirement plans, or my spending habits.

I run a very balanced and level-headed scheme for both, and I pinch pennies so I can plop about three grand a year into a money market account for an emergency fund.

When it came time to buy a house two years ago, I bought well below what my lender tried to convince me I could afford. And I chuckled outloud when he suggested any type of arm or balloon payment mortgage. No way, 30-year fixed was the only way.

My girlfriend gets a kick out of me using plastic shopping bags for luggage, and how much canned tuna I eat (Hey, it keeps me healthy!) I ride my bike to work about half the time, and my buddies keep telling me to trade in my old RCA television for one of those slick flat screens jobs.

Lately, I've spent most of my loose money on making improvements to my girlfriend's house so she can TRY to sell before her mortgage adjusts. And I send my dad about two hundred a month to help with his monthly bills.

So you ask, does the Fannie and Freddie bailout upset me a little.

You bet!

Next time, I'll throw all my chips into solar panels, or pixie dolls, whatever the next big bubble brings along.

I've read your blog for years -- I work in the financial industry too, in the UK since Sarbanes Oxley -- and you've been very prescient. But exactly how does bombing Iran or similar distract from or alter the current economic mess? It would just make things worse. It wouldn't even fool a critical mass of people into blaming it for the state of the economy.

CR, please don't mix politics with your incisive economic writings. FNM was created by FDR in 1938, and is a largely a Democratic institution. Furthermore, neither candidate came out against the bailout. This crisis transcends political partisanship. The criminals on wall street are apolitical, and only care about money. They determine the rules of the game, and both parties play within their rules.

US politics runs on the bogeyman principle: every election is won or lost on fear of something that is out to get us. Both sides play it.

Making Iran a bogeyman can win the Cheney administration a third term. Only 8% of the electorate is undecided and the next president will in effect be chosen by 3 counties in Florida and Ohio, so the candidates only have to convince a relatively few voters.

Eh, I should note that in 2004 40% of eligible voters didn't vote for president at all. What's always been interesting is how consistently the largest voting bloc in this country in recent years has been the one that doesn't vote at all, and doesn't see its interests affected one way or another by the elections. Question is, will that change much? (I'm thinking no, still.)

Spider: I also have a question for the commentor, thomas daulton, above. What do you mean with your "unbelieving friends"? What don't they believe?

Hey, sorry, I walked away from the Internet over the weekend.

Many of my relatives are among the Bush 22% "Dead-Enders" who swallow every word that falls from the mouth of Rush, Sean, and whoever the White House spokesmodel is at the moment. They don't believe the economy is bad at all; profits are up, everyone is doing just great, but they just don't know it. The Liberal Press likes to stir up discontent with false attacks because they hate George Bush almost as much as they hate John McCain. Because, after all, we still haven't technically had two consecutive quarters of negative growth have we?!?

Then I also have a bunch of "sensible liberal" friends, (elsewhere on the Internet I have described them as "fans of both Friedmans"), who believe that, yes, George Bush has personally ruined many aspects of the economy, and things suck for a lot of people right now... but c'mon, this is America, it's not so bad that Barak Obama can't fix everything up with a little tinkering around the edges during his first 100 days. Especially with the help and co-operation of the business sector. The Free Market will fix everything just so long as we have some kind of charismatic figurehead in the White House who sets a good example but does not actually regulate anything.

My friends and relatives are, at present, generally affluent enough that they're not yet capable of believing that the system itself is changing. They each have too much invested, too much of their lives, too much of their thought patterns, invested in the old version of the American Dream (depending on the person, they're each stuck in a particular year between 1950-1996 perhaps).

A long time ago TCR posted an article about upper-middle-class families in Russia who suddenly found themselves having to sell heirloom jewlery in order to buy food, after the Iron Curtain came down and in the subsequent economic chaos of the early 1990s. My friends and relatives strike me as similar to those people, T-[roughly] 3 years.

In the long run, the best way to protect yourself from this madness is to shun the U.S. dollar in favor of other currencies and gold.

GunsGoldRural property...My apples and plums are ripe...and the pond is full of fish. Plenty of ducks on the river. My neighbor started raising chickens. I'm considering a chicken coop myself. I live 5 miles from the Amish. They don't care about the economy one way or the other.

A long time ago TCR posted an article about upper-middle-class families in Russia who suddenly found themselves having to sell heirloom jewlery in order to buy food, after the Iron Curtain came down and in the subsequent economic chaos of the early 1990s. My friends and relatives strike me as similar to those people, T-[roughly] 3 years.

For the canaries in the coalmine, it's less than T-3 years. I'm likely one such canary.

"The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

Sarah Palin, a day before the Fed announced the takeover of Fannie Mae and Freddie Mac. We are supposed to buy her as part of the solution, when she doesn't even know how the system works?

philly...you can't be serious. Oh my. You liberals are in serious trouble. And all you can do is keep crying like babies. Grow up. Do you not have any clue how the world works yet? Liberals always pride themselves in how smart they are...and how "in touch" with the people they are. How can you be so clueless in understanding your fellow man? You guys are ridiculous. Your leading candidate is the GOPs greatest campaign asset. "The surge worked"!!!! hahahahahahahahahahaha....OOOOOOOOOHHHHHHHHHHHHHHH MMMMMYYYYYYYYYYY!!! This is a serious political race? The greatest foreign policy debacle since Vietnam and Obama can't help but describe what a success it is! We came...We killed a bunch of Arabs...we managed to control them to a non politically damaging level of violence!!! We WIN!!!!!!! Wow...what a victory. How come we still can't leave yet?????